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Target Costing

TARGET COSTING FOR NEW-PRODUCT DEVELOPMENT: PRODUCTLEVEL TARGET COSTING Robin Cooper and Regine SlagmulderEditors’ Note: This article is an updated synthesis of in-depth explorations contained in Target Costing and Value Engineering, by Robin Cooper and Regine Slagmulder (Portland, Oregon: Productivity Press, 1997). Part two of the series discusses product-level target costing; part three, to be featured in an upcoming issue, will address component-level target costing. tomers. Consequently, the objective of product-level target costing is to increase the allowable cost of the product to a level that can reasonably be expected to be achievable, given the capabilities of the firm and its suppliers (see Exhibit 1).

EXECUTIVE SUMMARY• Product-level target costing works to increase the allowable cost of the product to a level that is both reasonable and achievable given the capabilities of the firm and its suppliers. • Step one establishes the target cost by incorporating the capability of the firm and its suppliers into the allowable cost so that an achievable product-level target cost is established. • Step two uses value engineering to identify ways to design the product so that it can be manufactured at its target cost. • Step three applies the disciplining mechanisms to help ensure that the product-level target cost is achieved.

The target costing process contains three major sections: market-driven costing, product-level target costing, and component-level target costing. In part two of a three part series, this article discusses how product-level target costing works to increase the allowable cost of the product to a level that is both reasonable and achievable given the capabilities of the firm and its suppliers, in a three step process. Step one establishes the target cost by incorporating the capability of the firm and its suppliers into the allowable cost so that an achievable product-level target cost is established. Step two uses value engineering to identify ways to design the product so that it can be manufactured at its target cost. Step three applies the disciplining mechanisms to help ensure that the product-level target cost is achieved.

PRODUCT-LEVEL TARGET COSTINGThe objective of product-level target costing is to establish aggressive but achievable product-level target costs. These target costs should place considerable pressure on the firm’s product engineers to find creative ways to reduce the manufacturing costs of the products that they are designing. Target costs differ from allowable costs, because they incorporate the capabilities of the firm and its suppliers into the target costing process. In practice, it is not always possible for the designers to find ways to achieve the allowable cost and still satisfy the firm’s cus1

Product-level target costing can be broken into three steps (see Exhibit 2). In the first step, the product-level target cost is established. This step consists of incorporating the capability of the firm and its suppliers into the allowable cost so that an achievable product-level target cost is established. The second step consists of using value engineering (and other similar techniques) to identify ways to design the product so that it can be manufactured at its target cost. In the third step, the disciplining mechanisms of target costing are applied to help ensure that the product-level target cost is achieved. The disciplining mecha-

Article 32. TARGET COSTING FOR NEW-PRODUCT DEVELOPMENT: PRODUCT-LEVEL TARGET COSTING thereof require that the firm must reduce costs if it is to maintain its desired level of profitability. The degree of cost reduction required to achieve the allowable cost is called the cost-reduction objective and is derived by subtracting the allowable cost from the current product cost: Cost-Reduction Objective = Current Cost–Allowable Cost The current cost is the cost of a new product if it were manufactured today using...

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Department of MBA
100 Feet Ring Road, BSK III Stage, Bangalore – 560 085
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Process Costing
Submitted in fulfillment of the requirements for the 3rd SEM MBA Management Accounting and Control Systems
Submitted to: Submitted by:
Prof. G V M Sharma Vandana Rajput Dept. of MBA 1PB11MBA60
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Process costing is a form of operations costing which is used where standardized homogeneous goods are produced. This costing method is used in industries like chemicals, textiles, steel, rubber, sugar, shoes, petrol etc. Process costing is also used in the assembly type of industries also. It is assumed in process costing that the average cost presents the cost per unit. Cost of production during a particular period is divided by the number of units produced during that period to arrive at the cost per unit.
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Process costing is a method of costing under which all costs are accumulated for each stage of production or process, and the 2 cost per unit of product is ascertained at each stage of production by dividing the cost of each process by the normal output of that process.
Definition:
CIMA London defines process costing as “that form...

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An article by Louise Ross puts targetcosting in effect with agricultural and the farming industry, explaining how this system may already be partially in use. Louise Ross provides evidence of the advantages and disadvantages of targetcosting within the food supply chain.
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